Chase Manhattan Corp. has rejected a plan to turn a foreclosed warehouse on Manhattan's Upper East Side into a luxury rental apartment building.

Market sources said Chase turned down a $7 million offer from Heller Macaulay Equities Inc. for the property, at 1411 Third Ave. Chase said it was no longer negotiating about the site.

The developers said the bank is holding out for a better price.

Disputes over pricing have become increasingly common as developers seek bottom-fishing opportunities in the weak real estate market. To minimize the hit on capital, some banks continue to hold out for better prices.

No Distress Sales

Chase has said it is not interested in fire sales of real estate and is carrying foreclosed property on its books for an average of 56 cents on the dollar.

Jack C. Heller and Duncan C. Macaulay, the principals of the bidding company, had planned to spend $66 million to rehabilitate the 240,000-square-foot warehouse.

The duo is hoping to build on their recent success in converting a bankrupt hotel at 1049 Fifth Ave. in Manhattan into luxury condominiums.

"Money is coming to real estate, but it's coming in a different way," Mr. Heller said. "It's coming in a more active way. And it's coming to entrepreneurs who understand both the property and the capital."

Mr. Heller and Mr. Macaulay said they offer the right combination of local real estate savvy and international financial acumen to get deals done in today's market.

Mr. Heller has developed more than 1,500 units of housing and publishes an index of local condominium prices. Mr. Macaulay joined Mr. Heller from Investcorp after the Middle Eastern fund financed the rehabilitation of the bankrupt hotel.

About 30% of the lavishly appointed units in that building have been sold, with construction due to be completed at the end of this month. The average price for each condo: $3.5 million.

Some real estate experts question the viability of new development, no matter who the builder is. Apartment vacancies in the residential neighborhood surrounding the warehouse are running at 2% to 5%, according to REIS Reports, which analyzes real estate data.

With vacancy rates so high, rental rates have been in decline for several years.

Luxury Rentals Strong

Mr. Heller said, however, that he has identified a niche within the market where demand is strong: Newly constructed rental buildings with units that might sell for $500,000 to $1 million as condominiums. He said that for this type of apartment, "the vacancy rate is zero."

Mr. Heller noted that the few new buildings geared to that category of renter filled up almost immediately. He said New York rental apartments are regaining their appeal to young professionals.

Crime and taxes are on the rise in the suburbs, making a long commute to work seem less worthwhile, he said. And lower income tax rates and low interest rates mean the mortgage deduction isn't as compelling a reason to buy a home as it once was.

Indeed, Mr. Heller isn't the only one to see signs of demand for New York apartments lately. Charles E. Snyder, president of National Cooperative Bank, based in Washington, D.C., said competition to make the underlying mortgages on the stronger residential cooperative apartments in the city has increased.

Investors Interested

Further, experts said residential projects such as Heller Macaulay's are the kind that could attract offshore money. Daniele D. Bodini, president of American Continental Properties Inc., said apartment buildings are relatively cheap to fix up, and produce a return in fairly short order.

This is what has attracted the wealthy investors and mid-sized institutions in Europe that he represents to some U.S. apartments being sold by the Resolution Trust Corp., he said.

Mr. Macaulay expressed confidence that the money can be raised in Europe. The financing will involve a combination of debt and equity. Maturities will be matched to the cash flow from the project, taking advantage of the offshore investors' local tax laws.

"You know what it will cost to build the apartments," he said. "We've just finished 1049 Fifth Ave. We have an ability to build on time and on budget. The only variable is to buy the site at a price that's right."

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